Friday, 8 November 2013

Interest rates

Yesterday, in a shock move, the ECB [European Central Bank] has reduced the benchmark interest rate by a quarter to 0.25%. This was previously unchanged for the last twelve months. Reason unknown!

The official statement from the (ECB) says that it has cut the core interest rate in a bid to boost flagging economic recovery in the Euro area. However, there have not been many reports recently flagging any momentum that would require a change. The moved startled many investors while most economists thought the bank would wait to offer more economic stimulus at least until December.

The Bank of England yesterday kept its rates at 0.5% which have been stable for over four years now.

In addition to the ECB cutting its main refinancing rate to 0.25%, it held the deposit rate it pays on bank deposits at 0% and cut its marginal lending facility, or emergency borrowing rate to 0.75% from 1%. A lower refinancing rate makes it cheaper for banks to borrow from the ECB, in hopes that that lower rate will be reflected in what companies pay for credit.

The real question is this a reaction to the figures produced recently showing we are currently moving through a deflationary period.

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